New round of mortgage aid

U.S. and lenders aiming to help up to 1 million

November 12, 2008|By Mary Ellen Podmolik, TRIBUNE REPORTER

More help was promised Tuesday to hundreds of thousands of homeowners who have fallen behind on mortgage payments and are at risk of foreclosure: The government said it will fast-track certain loan modifications, while mortgage giant Citigroup announced its own program.

In all, efforts by the government and lenders to help people in over their heads are targeting as many as 1 million households as the financial crisis intensifies, but a potentially bigger government bailout for homeowners is still under discussion.

The new programs are being formulated as it has become painfully obvious that earlier government-led foreclosure prevention efforts were only mildly successful, as lenders and servicers didn't rush to participate in voluntary programs that were cumbersome to administrate.

Fannie Mae, Freddie Mac and the Treasury Department, along with a consortium of participating mortgage lenders, investors and servicers, said Tuesday their program would reduce monthly payments and potentially help hundreds of thousands of homeowners who have fallen at least 90 days behind in their payments.

The government-led effort will enable those lenders to assist not only their own customers, but also those loans that they service but do not own outright. For instance, while JPMorgan Chase owns and services $330 billion worth of mortgages, it also services $1.17 trillion in mortgages owned by others, much of that tied to Fannie Mae and Freddie Mac.

"Banks are starting to wise up, that they want to be modifying loan terms," said Jim Shilling, a real estate professor at DePaul University. "Who wants to be taking over $2 trillion of unsold properties?"

Citigroup announced a modification program for its own loans Tuesday that it believes will benefit 130,000 borrowers. In recent weeks, Chase and Bank of America initiated efforts to help up to another 800,000 at-risk borrowers combined.

In announcing details of the new government program, officials noted that the foreclosure crisis, once confined to subprime loans, has crept into the prime mortgage market as well. Fannie Mae said Monday that during the third quarter, more than 1,000 homes a week were added to its inventory of foreclosed, single-family homes.

Officials said that with the government program, rather than consider loan modifications on a case-by-case basis, the streamlined process uses uniform eligibility requirements that should speed assistance time.

To be eligible, participants must live in a single-family home, be 90 or more days delinquent on their payments and have 10 percent equity or less in their homes to receive a lower monthly payment that is no more than 38 percent of monthly household income. The homes can already be in foreclosure but the homeowner has to show proof of income and not be in bankruptcy.

For the modification to be official, the borrower must be current on the modified payment after three months.

"This is not loan forgiveness; the loans will be paid, but under terms that are affordable for borrowers," said Federal Housing Commissioner Brian Montgomery.

To encourage participation, loan servicers will receive a flat fee of $800 for each loan modified.

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Rescue options

A new government effort to keep more homeowners out of foreclosure provides these three options:

1. Extending the life of the loan to up to 40 years

2. Lowering the interest rate

3. Lowering the amount due on the loan, shifting the balance to the back end of the loan